Little drops make ocean: Microfin is big biz now

Two decades and over 3,000 MFIs later, the microfinance movement in the country has finally come of age.

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Aug 29, 2005, 01.21 AM IST

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Two decades and over 3,000 MFIs later, the microfinance movement in the country has finally come of age. While retaining its core value, the sector has emerged as a huge business opportunity waiting to be tapped.

���All stakeholders have now realised that microfinance is a powerful tool that can make a difference,��� says Udaia Kumar, MD of Share Microfin, a leading microfinance institution. ���There is acknowledgment that that rural masses are bankable,��� he adds.

While commercial banks are showing bulging microfinance portfolios, equity and debt funds as also loan guarantee funds are rushing in. ���Go Commercial��� appears to be the motto as microfinance institutions are racing to scale up.

Consider this: An estimated 80 million households in the country are in need of microfinance of which a mere 10% are serviced. Back of the envelope calculations show that the combined appetite of the rural and urban poor for credit stands around Rs 2,00,000 crore, against which a meagre Rs 5,000 crore, as recorded in bank outstandings, is flowing through the system.

Though microfinance has been one the most effective instruments of dealing with two crucial issues of poverty alleviation and women���s empowerment, the movement has faltered on account of lack of adequate resources and absence of enabling regulation. A study by Ford Foundation conducted in rural areas of Andhra Pradesh serviced by Share Microfin has shown that 76% of borrowers have crossed the poverty line. Also, around 95% of the clients of all MFIs are women. ���The movement must become self-sustaining in the long term,��� says Mr Sitaram Rao, CEO of SKS, a leading MFI working in the Telangana area of Andhra, a state which accounts for the highest penetration of micro finance.

The banks, of course, are gearing up to increase their exposures. While ICICI Bank has a portfolio of Rs 1,000 crore, Stanchart���s has an exposure of Rs 13 crore with another Rs 9 crore in the pipeline, HSBC has a portfolio of Rs 13-14 crore and ABN has approved loans worth Rs 86 crore and hopes to increase it to Rs 100 crore by the year-end. Ditto for HDFC Bank and UTI Bank.

What is more significant, perhaps, is the entry of private debt-equity funds. US-based Unitus, a microfinance accelerator with a venture capital approach, has already committed to SKS, BSS, Grameen Koota in Karnataka and Bandhan in West Bengal. The $10-million Bellwether Microfinance, jointly promoted by Gray Ghost Microfinance Fund, the Hivos-Triodos Fund and the former CEO of Bank of America Arun Duggal, is investing in equity and debt of MFIs. There are also the loan guarantee funds of the Grameen Foundation and Deutsche Bank.

But before all this can translate into high energy activity, MFIs will need to transform from being charitable to profitable entities. They will not only have to cover costs, but also make margins and declare dividend for shareholders. A move in that direction has already started with most leading MFIs in the country, like Spandana, Share Microfin, Basix India and SKS, all located in Andhra Pradesh, Cashpor in UP and Sarvodaya Nano Finance, opting for a NBFC status.

Share Microfin is in the process of tying up a $2 million equity investment from Mr Vinod Khosla, who will get a 15-17% stake in the institution. The MFI, which has been paying 10% dividend for the past two years, is also seeing interest from ShoreBank, Sidbi and IFC. Likewise, Basix India has equity investors like Hivos Tridos Funds, HDFC, ICICI Bank and IFC, while the Guntur-based Spandana is looking for equity investment.

SKS, which has a capital base of Rs 2.06 crore, entirely community owned, is on the verge of receiving a $750,000 capital infusion of which equal amounts of $250,000 each are expected from Mr Khosla, from Unitus and from the Tungare Manohar Social Foundation run by techies-turned-philanthropists Tungare Manohar and Ravi Reddy.